The big show is coming tonight

Mathan Somasundaram

Deep Data Analytics

The local market fell from the start and then spent the rest of the day in relative volatile negative territory. Australian budget was mainly ignored as the main show is the US inflation. Australian federal budget was mainly as expected and flagged. Energy and Utilities were the worst hit sectors while Tech and Telecom were the only green sectors. 

Everyone will be staying up to watch the US market tonight. Inflation is going up…and will continue to go up for months to come. It is all about the reaction from US Fed and the markets. Long term cycle is clearly higher rates while short term cycle is purely dependent on US Fed market manipulation and bond/currency market capitulation. And for the record books, it is different this time. We have never had the current level of debt, market manipulation and stimulus running into reflation cycle with asset bubbles everywhere. What can go wrong? Time will tell.

Debt and deficit: the Australian Budget

Budget is a fairy tale of endless spending to drive historic doubling of debt in the next few years with no reform agenda to show for it. The Federal government is throwing cash at every election problem in sight and there is a lot of them. There is an election coming in Sep/Oct before the economic data collapses. There is no plan for reform but enough cash to distract the public from the structural issues that are left to fester. Australia for decades moves from commodity boom to property boom. China drives the commodity boom in the West and RBA cuts rates to deliver property boom. Fiscal stimulus historically are emergency use after economic/market crash to buffer recovery. But this time around, we are doubling debt and spending like a drunken sailor after economic recovery. We are fighting with China and rates are already at an historic low. We have no plans to pay off the debt and deficits are here to stay for the next decade at best. How does a government that ran on reducing “Debt and Deficit” deliver the complete opposite? It is actually quite simple. The economy has structural problems that have not been fixed for years while the lack of reform means the economy lacks new growth engines. The only way to sugar coat a broken economy through an election is to destroy the credit card.

The problem is that we are already sitting on a commodity and a property boom while RBA has already cut rates to historic lows. Just to make it worse, we are going to double down on debt and cut taxes to bankrupt the future budgets for at least the next decade. The obvious argument would be that we are going to grow our way out of this cycle. Isn’t everyone doing that? Sadly the track record of this strategy is not very good. This is the standard election budget playbook we call “pump and dump” in broking. The basic play book is that most of the funding either flows straight into service/asset providers margins via higher prices or funding is never fully used due to the higher regulations/bar to access it. The devil is in the detail and the budget track record is abysmal at best. This budget almost guarantees taxes at all levels will rise in the next decade. Everything from GST to super to property to death will be in the new or higher tax category due to funding problems. 

We are about to hit over a trillion dollars of debt as global rates start to rise and both our growth engines (i.e. commodity and property) are in historic bubbles. What could go wrong? Time will tell.

Back to the main show tonight: US inflation 

We know the underlying cycle in corporate earnings, as well as currency and commodity markets, are clearly showing inflation is heading higher in the US. That cycle is likely to go a lot further than US Fed or the market would like to admit. The question is not whether inflation is going up, it is what the US Fed and the markets are going to do. Historical trend suggests US Fed will ramp up QE to control yield. So far that has bought them some extra time while further debased USD and driving future inflation even higher. When will the bond/currency markets lose faith in US Fed and run over the manipulations? Time will tell. Hedge funds will be sitting on a lot of shorts to play the market worries. It is not normal to see NASDAQ fall 2% and recover to almost flat in a single day. Short covering and leverage bets are going to exaggerate everything. Buckle up!!!

Comments on US market last close…

US market started very weak before an array of US Fed speakers and late pump into big techs made it less negative. DOW -1.36%, S&P -0.87%, RUSSELL -0.26% and NASDAQ -0.09%. NASDAQ was down over 2% before the big tech pump late in the day made it flat. It still hides the fact that most NASDAQ stocks were hit hard again. Yields are rising ahead of the inflation data tonight. USD was weaker and that remains positive for commodities and AUDUSD. All sectors were red with Energy and Banks leading the bleeding while Gold sub-sector was a shining green zone. You can't have the cake and eat it too. You can't have massive commodities prices and growth bounce without inflation. Even China has rising inflation despite strong Yuan. Time to get off the fence and buy some Gold and Bear ETF protection.

Full SUNSET STRIP report with end of day market stats are on the attached link.

(VIEW LINK)

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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